Despite what hindsight might show to be an unwise decision, Oil Search Ltd.’s board quickly accepted the resignation of its top executive Keiran Wulff, creating worries about the future of the big North Slope Pikka development and further opportunity for regional competitor and shareholder Santos to take over the company - and Pikka - at an undervalued price. However, despite badgering from concerned analysts and investors, Oil Search’s board and executive leadership team appear to be standing together in an attempt to stay on track with company-wide plans announced in November, including those for Alaska.
Chief Financial Officer Peter Fredricson, who joined Oil Search in March from gas pipeline owner APA Group, has been named acting chief executive; an appointment that has the support of the board and the executive leadership team. (That team includes Bruce Dingeman, president of Oil Search Alaska.)
Oil Search’s unexpected July 19 announcement (July 18 in Alaska) that Wulff had resigned, combined with a conference call that gave some listeners the impression the company was backing off its development timeline for the Pikka unit, cast uncertainty about the project’s immediate future.
Tom Stokes, director of Alaska’s Division of Oil and Gas, told Petroleum News at 12:30 p.m. on July 19, he had just gotten off the phone with an Oil Search Alaska, or OSA, executive who had called him with assurances that “nothing has changed” on the development timeline of the Pikka project. The goals remained the same.
Still, Australia-based Santos Ltd., a big regional player which has acquired several energy assets in that area over the last few years, is pushing hard to get Oil Search Ltd. to sell, which wouldn’t mean the Pikka project would get cancelled, but any time a field gets a new owner, it can create a delay. And Santos is a regional player, who would likely seek a buyer for Pikka.
ConocoPhillips has made it clear it is in acquisition mode and with Pikka and the other OSA western North Slope acreage smack dab in the middle of its operating area, ConocoPhillips would definitely be a potential buyer.
But a sale of any kind would likely mean a one-year delay in Pikka development.
Board snubs SantosWhen asked in the Q&A session of the July 19 conference call if they had received any purchase offers, Oil Search Chairman Rick Lee said they had not. Hours later Santos revealed that it had made an offer and had been in non-binding negotiations with Oil Search.
The next day, on July 20, Oil Search issued two ASX announcements, clarifying its position and saying in one that it had “recently received a confidential non-binding and indicative change of control proposal.”
The proposal, the company said, “has been carefully assessed” by Oil Search’s board and senior management - “excluding Dr. Wulff” - and its “advisers Goldman Sachs and Macquarie Capital, as well as legal advisers Allens.”
Following that assessment, the proposal was rejected as the “terms and value” were “determined to not be” in the best interest of Oil Search shareholders.
In its other July 20 release, Oil Search said following Santos “disclosing details of its non-binding indicative change of control proposal that it is always open to receiving and engaging on any proposal that is in the best interest of shareholders. Oil Search agrees with Santos that there is strategic logic in a combination of the two companies.”
However, the company said the terms of any such combination need to be fair for Oil Search shareholders and those in Santos’ original proposal were “demonstrably not.”
Furthermore, Oil Search said it had “communicated to Santos that it is open to receiving a revised proposal which more appropriately reflects the value which Oil Search would bring to any combined entity. At this stage no such proposal has been forthcoming.”
Clarification on AlaskaSo, what did Lee and other Oil Search executives say about Pikka in the July 19 conference call?
In his opening remarks Lee said, “the board looks forward to working with Peter to ensure that production projects in Papua New Guinea and development of initiatives in both PNG and Alaska remain on track and on budget.”
But one of the strongest clarifications stemmed from questions asked by RBC analyst Gordon Ramsay. Following is that Q&A segment:
Gordon Ramsay: Thank you very much. I just want to say I’ve known Keiran for a long time and I’ve seen nothing but a professional, dedicated attitude towards his job and the industry. So, I’m obviously somewhat perplexed by all of this. I just want to clear up one thing that’s come through on this call and that’s related to the timing on the Pikka project in Alaska. I’ve asked this on calls before and Keiran has answered me numerous times about the timing. My understanding was the goal was to do the sell-down and FID (final investment decision) of the project before the end of this year. I just heard on the call that there is now no timing on this project. Is that correct?
Peter Fredricson: The answer to that question is that you could put a time on anything, a definitive date in the diary and then if you determine that you’re going to go ahead with that, with whatever you want to do at that date, without reference to anything else, then the outcome could be suboptimal. We’ve always said that we wanted to ensure that both ourselves and Repsol, indeed, want to ensure that we have taken some of the risk of this project off our own balance sheets. That has begun, that process has begun in the context of the sell-down of an equity holding, an equity interest of between 14% and 15% for each of us. That’s a process that we have been running and we are running.
But we’re not going to put ourselves in a position where we say that it has to be completed by 1 November to go to FID, just so that we go to FID on that date. What we’ve said is we will go to FID when we’ve got the appropriate risk allocation and funding in place and that may not be 1 November. You work for an investment bank that works on these sorts of projects all the time and we know that they don’t always run to a timetable like a bus. Well, maybe some buses don’t run to timetables either, but you know what I’m saying.
So, at the end of the day, the most important thing for us is not the timetable but is getting the funding structure right. We think that adds most value for our shareholders. We don’t think a delay in FID from a date in November this year is particularly value decretive, in fact we don’t see it as value decretive at all, to be fair. So, from our perspective, we want to get the funding right. That’s both ourselves and our partner.
Gordon Ramsay: Just to confirm, this is completely independent of Keiran leaving the company? … is the fact that he’s leaving the company … had any effect on the timing? (Note: Keiran Wulff initially headed Oil Search Alaska before being appointed managing director of Oil Search Ltd. in February 2020. He was a strong proponent of Oil Search’s investment in the state.)
Peter Fredricson: No, and again, in the time that I’ve been with Oil Search and sat in meetings with Keiran, we’ve talked more about getting the funding structure right than we have about a date. Certainly, people have had in mind a date, but I don’t think we’ve ever been in a position where we’ve said, damn the horses, we’ll go on the date, no matter what. A date has been there for guidance, but a date is not - we’re not absolutely wedded to a date. We are wedded to a structure for funding and we’ve got to get that right.
Gordon Ramsay: Got you. Okay, thanks.
Fredricson’s earlier Alaska commentsIn his opening remarks Fredricson said the following about Alaska: “We’ll work with our partners to take Papua LNG into FEED next year, with the target for FID in 2023 and first gas in 2027. We will work with our partner Repsol on achieving an appropriate funding structure for our Alaska project, prior to committing to FID. That includes the work we are currently doing on a possible joint sell-down of equity in the project, consideration of the sale of mid-stream infrastructure within the project and reviewing relevant markets for an appropriate level of debt financing to support the project.”
Passion for Alaska?Saul Kavonic, an analyst from Credit Suisse, also asked questions about Alaska and the impact Wulff stepping down would have on Pikka development. Following is some of what he asked in the Q&A session:
Saul Kavonic: The target sell-down, can you just confirm if you are still targeting sell-down and FID for Alaska in the second half of this year?
Peter Fredricson: Saul … the message we’ve been trying to get across in respect of FID for Alaska is that it’s not targeted to a specific date. If the market has felt that that was the case in the past, it’s certainly not the case today. FID for that project will be dependent on ourselves and our partners, Repsol, agreeing that we’ve achieved an appropriate sharing of risk with other investors, either by way of an equity sell down, or by way of a mid-stream infrastructure sell down and appropriate levels of funding available to see the project through to first oil. Those are the things that come first. When we get to that point, then we will consider FID at that point. But we’re not constrained here by any targeted date whatsoever.
Saul Kavonic: Understood. A follow-up for that, Peter, if I may. Keiran was obviously known for being very passionate about Alaska and driving that through the business. Do you have the same level of passion for the Alaska project?
Peter Fredricson: I think the business has the same level of passion for the project, from the board, through the ELT (executive leadership team), through to people working in the business.
Wulff’s resignationSaul Kavonic: Can you confirm that you’ve not had any concerns regarding the CEO’s behavior raised to you prior to middle of June this year?
Rick Lee: I can confirm that we responded to a whistle-blower statement which alerted to the board the behavioral issues. I think that was around the middle of June. We’ve been working hard in the period since then. We have certainly, over a long period since Keiran’s appointment, we have certainly supported him in what was a pretty challenging role from day one. Our priority was to protect the company to make the changes that were made and pursue the strategy that was articulated last November. I think through that period we had absolutely no concerns whatsoever.
Daniel Butcher, CLSA analyst: Did Keiran resign for health or was he going to be asked to leave anyway for his overbearing management style? If it was for health, why mention the (whistleblowers’) letter? If it’s the latter, why say he resigned?
Rick Lee: Look, he resigned on medical grounds. We can’t go into detail of his medical condition for obvious reasons, but we had alerted him to the issues raised in the whistleblower statement and entered into discussions with him and that was the result of those discussions.
Petroleum News has confirmed through its trusted sources that Wulff had a long-term medical condition which had taken a turn for the worse in June.
It is well known that Wulff took over as managing director of Oil Search Ltd. just as the COVID-19 pandemic got underway and right before a plunge in oil prices. As a result, he was forced to lay off approximately one-third of the company’s staff, engendering hard feelings.
He was considered brilliant, a visionary and decisive by those who were close to him.